11/12/2008 12:06:00 PM
Who will gain most from Sim-only deals?
Over the past year, we have seen an explosion in Sim-only deals for contract and prepay customers in Europe. Orange used a picture of a Sim on the cover of its October retail brochure and Sim-only offers are a key part of O2’s portfolio right now. Such deals offer just a Sim (and some minutes for contract subscribers), but come without the subsidised – or free – phone attached to other plans.
I have read that Sim-only deals now account for over 15% of connections in some European countries. Because operators don’t have to subsidise a new device, they are normally prepared to offer a better deal to Sim-only customers. This means more minutes and texts for less money, as well as a shorter minimum contract term of 30 days.
In the current economic climate, Sim-only deals are proving increasingly popular with people trying to reduce how much they spend on their mobile. They can keep their current phone and pay less for more minutes and texts than they did with their previous (lengthy) contract.
While this is an obvious winner for most users, I have reservations about the benefits of the business model for network operators. Most of the people at operators that I have spoken to defend Sim-only as a great product, because within 24 hours they are making a profit on it. When they give away phones to contract customers they might wait as long as 10 months to make money. This is very important to operators, as subsidy (or a lack of it) contributes significantly to their much-prized EBITDA profitability.
However, Sim-only deals are also allowing people to think again about how they buy their mobile service. Given the freedom of acquiring airtime with or without a free device, people are seeking new ways of buying a phone. As people turn to online retailers or auction sites like eBay, I am not sure it is such a great move for operators.
Role of subsidies
Subsidy remains important. Look what happened to the iPhone – once Apple ran out of people in France, Germany and the UK, who were willing to pay a premium for it, few buyers were prepared to spend almost £269 on a phone when every other device was free. That led Apple to rethink its approach and allow operators to subsidise the iPhone.
The result? Huge demand that is still growing. But this came about only after operators subsidised the iPhone and encouraged buyers to consider it alongside other (free) smartphones.
If operators insist on pursuing the short-term gain of EBITDA at the cost of a long-term relationship with their customers, eventually they will erode subsidies to the point at which the likes of Apple, Google and Nokia no longer need them and decide to do it themselves, and they surely will.
Nokia is proving that a direct model can work in India and Africa, and is chomping at the bit to sell straight to the consumers in the Western European markets. I think there is a real possibility that further growth in Sim-only deals will undermine the operators’ position and give manufacturers direct access to customers.
Shaun Collins is the managing director at CCS Insight